Policy Responses to Balance-of-Payments Crises: The Role of Elections

Open Economies Review 27, 2 (April 2016): 204-227

35 Pages Posted: 6 Nov 2015 Last revised: 8 Jun 2016

See all articles by J. Lawrence Broz

J. Lawrence Broz

University of California, San Diego (UCSD) - Department of Political Science

Maya Duru

University of California, San Diego (UCSD) - Department of Political Science

Jeffry Frieden

Harvard University

Date Written: January 1, 2016

Abstract

Governments have a number of policy tools that can be used to address pressure on the balance of payments. When market pressure leads to an unsustainable decline in the relative value of the domestic currency, authorities can: (1) sell reserves, (2) raise interest rates, (3) impose capital controls, (4) apply trade restrictions, or (5) depreciate the currency. While researchers typically analyze these policies in isolation from one another, we treat them as a menu of options available to election-minded politicians. We construct a new dataset that documents patterns in the use of these five policy responses to payments difficulties for a large sample of countries since the early 1970s. We argue that governments try to minimize political costs by adopting less transparent policies first and only moving to more visible policies if necessary, delaying the most visible and politically-costly policies until after elections. These claims are consistent with our findings: governments are more likely to draw down reserves and impose capital controls before other options. If these policies do not succeed, they tend to raise interest rates. If further action is needed, they delay devaluations and trade protection until after elections.

Keywords: currency crises, balance of payments, electoral politics

JEL Classification: F13, F32, F36, F40, F41, F42

Suggested Citation

Broz, J. Lawrence and Duru, Maya and Frieden, Jeffry, Policy Responses to Balance-of-Payments Crises: The Role of Elections (January 1, 2016). Open Economies Review 27, 2 (April 2016): 204-227. Available at SSRN: https://ssrn.com/abstract=2686403 or http://dx.doi.org/10.2139/ssrn.2686403

J. Lawrence Broz (Contact Author)

University of California, San Diego (UCSD) - Department of Political Science ( email )

9500 Gilman Drive
Code 0521
La Jolla, CA 92093-0521
United States

HOME PAGE: http://pages.ucsd.edu/~jlbroz/

Maya Duru

University of California, San Diego (UCSD) - Department of Political Science ( email )

9500 Gilman Drive
Mail Code 0521
La Jolla, CA 92093-0521
United States

Jeffry Frieden

Harvard University ( email )

1737 Cambridge Street
Cambridge, MA 02138
United States

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